Morgan Stanley has indicated that Chinese stocks could experience a more “sustained rally” beyond an immediate surge, bolstered by recent stimulus measures and policy signals. In a report dated September 29, Morgan Stanley analysts noted that the policy changes announced last week surpassed their expectations, featuring strong monetary easing and unprecedented actions aimed at stabilizing the stock market and curbing the property market’s decline.
The analysts forecast at least a 10% rally in the near term, with additional gains anticipated. They see potential for a more prolonged rally, contingent on clearer signs of earnings improvements and broader economic recovery efforts to combat deflation. Morgan Stanley has expressed a preference for certain stocks expected to benefit from these easing measures, specifically targeting A-share companies with high dividend yields and substantial free cash flows in relation to the 2.25% relending rate, as well as discounted shares listed in both Hong Kong and mainland China.
A-shares are those listed in mainland China. Morgan Stanley conducted several stock screens to identify those poised to benefit from the recent announcements. One screen highlighted six stocks listed in Hong Kong that trade at significant discounts compared to A-shares, which are expected to gain from the central bank’s measures. Another screen identified stocks with dividend yields below 2.25% but with free cash flow yields significantly above 4%, making these firms likely candidates for increased dividend payouts, share buybacks, or increased shareholdings.
Chinese stocks had already rallied last week and continued to rise on Monday following the Chinese central bank’s announcement of measures to support economic growth. These included a 50 basis point cut to the reserve requirement ratio (RRR) for banks, along with plans for interest rate cuts. This move followed a high-level meeting where top leaders emphasized halting the decline in the property market and strengthening fiscal and monetary policies.
Morgan Stanley expects an auxiliary budget to be announced in late October, aimed at boosting consumption and local government financing. The bank also anticipates an additional rate cut of 10 to 20 basis points and another 25 to 50 basis point RRR cut by the end of the year.
This report was contributed to by CNBC’s Evelyn Cheng.
